This chapter presents a selection of recent regulatory and standard-setting initiatives by OECD, G20 and Financial Stability Board members, as well as by some international institutions. It focuses on the main efforts to strengthen sustainability-related disclosure, the regulation of investment funds, and the guidance for ESG rating and data providers.
Global Corporate Sustainability Report 2024
3. Recent regulatory and standard‑setting developments
Abstract
This chapter summarises some regulatory initiatives and proposals by OECD, G20 and Financial Stability Board members, as well as by relevant international institutions, which may be meaningful for policy makers, regulators and market participants globally. The developments summarised below took place between October 2022 and September 2023, and they have been selected either because of their international importance or due to the novelty of a potentially effective policy.
The International Sustainability Standards Board (ISSB) issued its first two standards IFRS S1 and IFRS S2 in June 2023 (IFRS Foundation, 2023[11]). IFRS S1 includes general disclosure requirements to enable companies to communicate sustainability-related matters to investors. IFRS S2 sets out detailed climate-related disclosure requirements and it is designed to be used together with IFRS S1. Both standards incorporate TCFD recommendations. Even before publishing these standards, the IFRS Foundation opened a consultation on the ISSB’s next 2‑year agenda priorities, including beginning new standard-setting projects on four reporting matters: (i) biodiversity, ecosystems and ecosystem services; (ii) human capital; (iii) human rights; (iv) integration in reporting (IFRS Foundation, 2023[12]).
The International Organization of Securities Commissions (IOSCO) endorsed in July 2023 the IFRS S1 and IFRS S2 standards (IOSCO, 2023[13]). This included a call “on its 130 member jurisdictions […] to consider ways in which they might adopt, apply or otherwise be informed by the ISSB Standards within the context of their jurisdictional arrangements”. The United Kingdom’s Financial Conduct Authority declared in June 2023 that their “intention is to update our climate-related disclosure rules to reference the ISSB standards” (UK FCA, 2023[14]).
The European Union’s 2022 Corporate Sustainability Reporting Directive (CSRD) will generate some important changes in EU member countries’ regulatory frameworks. One of the most relevant innovations brought by the CSRD is that companies subject to the new Directive will have to disclose sustainability‑related information according to the EU Sustainability Reporting Standards (ESRS), which are being developed by the European Financial Reporting Advisory Group (EFRAG). The first set of ESRS was adopted by the European Commission in July 2023, and they embarked on a full range of sustainability matters, including climate, pollution, water, biodiversity, workers and business conduct (European Commission, 2023[15]). The CSRD also establishes that sustainability-related disclosure will need to be assured at a “limited” level by registered service providers, and the European Commission has the authority to require by 2028 a “reasonable” level of assurance if such a level is considered to be feasible for auditors and for reporting companies. The application of the new Directive will take place in four stages: (i) reporting in 2025 for companies already subject to the 2014 Non-Financial Reporting Directive (NFRD); (ii) reporting in 2026 for large companies that are not currently subject to the NFRD; (iii) reporting in 2027 for listed small and medium enterprises; (iv) reporting in 2029 for third‑country undertakings with net revenues above EUR 150 million in the European Union (EU) if they have at least one subsidiary or branch in the EU exceeding certain thresholds.
A preliminary analysis of the share of non‑EU companies that will be required to report sustainability information under the CSRD starting from fiscal year 2028 shows that the EU regulation will impact several regions. In European countries outside of the EU, 34% of listed companies by market capitalisation have a total revenue of more than EUR 150 million generated in either 2021 or 2022 in the EU and may need to comply with the CSRD in the future. In the United States and Latin America, a smaller share of companies, representing 7% of the market capitalisation in both regions, generate revenues within the thresholds set by the EU. Companies located in Asia would be less affected, with small percentages both in terms of the number of companies and market capitalisation. As the analysis is based on the geographical distribution of companies’ revenue, the results may be underestimated because several companies do not report such information (Figure 3.1).
Figure 3.1. Share of listed companies with net revenues above EUR 150 million in the EU
CSRD's global impact may be more important in non-EU countries, the United States, and Latin America
Source: OECD Corporate Sustainability dataset, LSEG. See Annex A for details.
ISSB’s Sustainability Standards Advisory Forum met for the first time in April 2023. The Forum brings together representatives from different regions – including EFRAG – with the goal of contributing to the development of “standards that provide a comprehensive global baseline of sustainability‑related disclosures that is interoperable with jurisdictional standards on sustainability reporting”. Moreover, the ISSB declared in July 2023 that “the European Commission, EFRAG and the ISSB have worked jointly to improve the interoperability of their respective climate-related disclosure requirements in the overlapping climate disclosure standards” (IFRS Foundation, 2023[16]).
The European Union requires companies subject to NFRD – and those that will be subject to CSRD – to disclose how and to what extent the company’s activities are aligned with the climate‑related objectives in the EU Taxonomy, which is a classification system for environmentally sustainable activities. Currently, the companies must report the share of their total revenues and capital expenditure (as well as operational expenditure for non‑financial companies) that meet the criteria set in the EU Taxonomy. In June 2023, the European Commission proposed new disclosure requirements for the remaining four objectives in the EU Taxonomy starting from 2024: the sustainable use and protection of water and marine resources, the transition to a circular economy, pollution prevention and control, and the protection and restoration of biodiversity and ecosystems. The proposal still needs to be approved by both the European Parliament and Council (European Commision, 2023[17]).
The OECD updated in June 2023 its Guidelines for Multinational Enterprises on Responsible Business Conduct, which are recommendations jointly addressed by governments to multinational enterprises to enhance the business contribution to sustainable development and address adverse impacts associated with business activities on people, the planet, and society (OECD, 2023[18]). Key updates include recommendations (i) for enterprises to align with internationally agreed goals on climate change and biodiversity; (ii) for risk-based due diligence on the development, financing, sale, licensing, trade and use of technology, including gathering and using data; (iii) on how enterprises are expected to conduct due diligence on impacts and business relationships related to the use of their products and services; (iv) for enterprises to ensure lobbying activities are consistent with the Guidelines.
The European Securities and Markets Authority (ESMA) launched a consultation on guidelines on funds’ names using “ESG” or “sustainability” related terms in November 2022 (ESMA, 2022[19]). The consultation sought feedback on the proposal that, if a fund has any “ESG” related words in its name, “at least 80% of its investments should be used to meet the environmental or social characteristics or sustainable investment objectives” in accordance with the definitions in the Sustainable Finance Disclosure Regulation (SFDR). Moreover, “if a fund has the word ‘sustainable’ or any other term derived from the word ‘sustainable’ in its name, it must allocate within the 80% of ‘ESG’ investments” at least 50% in “sustainable investments” as defined by SFDR.
In the United States, the Security and Exchange Commission (SEC) adopted amendments to the “Names Rule” under the “Investment Company Act” of 1940, which addresses fund names that are likely to mislead investors about a fund’s investments and risks (SEC, 2023[20]). The Names Rule generally requires registered funds whose names suggest a focus in a particular type of investment to adopt a policy to invest at least 80% of the value of their assets in those investments (an “80% investment policy”). Among other things, the amendments to the Names Rule are designed to enhance the rules' protections by requiring more funds to adopt an 80% investment policy, including funds with names that include terms suggesting a focus in investments that have, or whose issuers have, particular characteristics. This includes, for example, names with terms such as “growth”, “value” or certain terms that reference a thematic investment focus, such as the incorporation of one or more environmental, social and governance factors.
In July 2023, the SEC also introduced new rules to enhance and standardise public companies’ disclosure regarding cybersecurity risk management, strategy, governance and incidents (SEC, 2023[21]). The SEC adopted amendments to require current disclosure about material cybersecurity incidents and to require periodic disclosures about a company’s processes to assess, identify and manage material cybersecurity risks, management’s role in assessing and managing material cybersecurity risks, and the board oversight of mentioned risks.
In Japan, all listed companies are recommended to develop a basic policy and disclose initiatives on the company’s sustainability. However, companies listed in the Prime Market should also enhance the quality and quantity of climate‑related disclosure based on TCFD recommendations or equivalent international frameworks. The relevant ordinances were revised in January 2023 to make specific disclosure of sustainability information in the Annual Securities Report mandatory, including the company’s responses to climate change and human capital, effective from the financial year ending in March 2023.
In Hong Kong (China), the Stock Exchange of Hong Kong Limited published a consultation paper seeking market feedback on proposals to enhance climate‑related disclosures under the environmental, social and governance (ESG) framework in April 2023. It proposed that all issuers be mandated to make climate‑related disclosures in their ESG reports based on the provisions of the ISSB Climate Standard in respect of financial years commencing on or after 1 January 2024. The consultation period ended in mid‑July 2023 and the Stock Exchange of Hong Kong Limited has since postponed the implementation date of the amendments of the listing rule to 1 January 2025 to allow issuers more time to familiarise themselves with the new climate-related disclosure requirements (HKEX, 2023[22]).
In India, the Securities and Exchange Board of India (SEBI) introduced in July 2023 a requirement for the largest listed entities by market capitalisation to obtain external assurance at a “reasonable” level of a set of Key Performance Indicators, and they embark a full range of sustainability matters, including GHG footprint, water, energy, circularity, employee well-being, gender diversity, and fairness in engaging with customers and suppliers, among others. The requirement will initially apply to the largest 150 listed entities for the 2023‑24 financial year, and it will gradually be extended to the largest 1 000 listed entities from the 2026‑27 financial year onwards. Notably, the new regulation specifies that the “board of the listed entity shall ensure that the assurance provider […] has the necessary expertise” and that the “listed entity shall ensure that there is no conflict of interest with the assurance provider” (SEBI, 2023[4]). Additionally, there are other Key Performance Indicators that must be disclosed but for which assurance is voluntary, including, for instance, the “percentage of R&D and capital expenditure investments in specific technologies to improve the environmental and social impacts of product and processes to total R&D and capex investments made by the entity”.
SEBI also introduced a regulatory framework for ESG rating providers in July 2023 following a principles-based approach. Particular attention has been given in the regulations to transparency, conflicts of interest, rating process, monitoring of the ESG rating, procedure for reviewing the ESG rating and internal procedures. SEBI’s approach for ESG ratings and ESG rating providers envisages a detailed disclosure of the rationale behind the assigned ESG rating.
In Singapore, the Monetary Authority of Singapore launched a public consultation on a voluntary code of conduct for ESG rating and data providers in June 2023 (MAS, 2023[23]). The code was co‑developed with industry representatives and it covers good practices on governance, disclosure of ratings methodologies and management of conflicts of interest. It is modelled along the recommendations set out in the IOSCO’s call for action to promote good practices among their members to counter the risk of greenwashing related to asset managers and ESG rating and data providers (IOSCO, 2022[24]). Following the public consultation which ended in August 2023, the Monetary Authority of Singapore published, in December 2023, its finalised Code of Conduct for ESG rating and data product providers and an accompanying checklist for providers to self-attest their compliance to the Code of Conduct (MAS, 2023[25]).
In Brazil, the Securities and Exchange Commission established in December 2022 requirements that investment funds whose names contain a reference to environmental, social and governance matters, such as “ESG” or “green”, should specify in their legal documents the following: (i) which ESG benefits are expected and how the fund aims at fulfilling them; (ii) which standards or methodology will be used to classify the fund in a specific ESG‑related category; (iii) who is going to verify whether the fund has been correctly classified in the chosen ESG‑related category; (iv) information about the content and frequency of the ESG‑related performance disclosure of the fund (CVM, 2022[26]).
International Auditing and Assurance Standards Board (IAASB) published an exposure draft of the proposed International Standard on Sustainability Assurance (ISSA) 5000 in June 2023. The aim of IAASB with the proposed standard is to define a reliable framework for sustainability assurance engagements that applies to all sustainability topics and reporting frameworks with the sole exception of assurance on separate GHG emissions statements (for which ISAE 3410 would apply). The proposed ISSA 5000 would cover both limited and reasonable assurance engagements, identifying general requirements for pre‑engagement responsibilities (such as engagement acceptance, quality management, and planning activities), performing procedures (such as identifying and managing risks, obtaining evidence, testing, and addressing material misstatements) and for the assurance conclusion. Final approval of the standard is targeted for September 2024 (IAASB, 2023[27]).
The International Ethics Standards Board for Accountants (IESBA) held four global roundtables in March and April 2023 to obtain stakeholder input to help in the development of new ethics and independence standards for sustainability reporting and assurance (IESBA, 2023[28]). The exposure drafts were approved in December 2023 and the announced goal is to finalise the standards by the end of 2024 (IESBA, 2023[29]).